Finance

China's railway construction hits financial buffers

Although China's central government has increased financial support for railway construction projects, the funds have proven insufficient, leaving the Ministry of Railways and some local governments with no choice but to take out loans.

The country plans to raise its investment in railway construction to 516 billion yuan (US$83 billion) from the 406 billion yuan (US$65 billion) budgeted in early 2012, reports Guangzhou's 21st Century Economic Report.

The total planned investment in railway fixed assets was increased to 630 billion yuan (US$101 billion) from the 500 billion yuan (US$80 billion) earmarked earlier this year. A large portion of the investment in railway construction and fixed assets would come from the central government, the report said.

Construction work on several railway lines, including one that will link Golmud in China's western Qinghai province to Dunhuang in neighboring Gansu, will require a total investment of 12.9 billion yuan (US$2 billion). Work on the project began earlier this month and some others are also expected to commence soon.

Even though the central government extended more cash to the Ministry of Railways, it appears insufficient to resolve the ministry's financial predicament; the ministry must borrow money to allow railway construction to proceed.

The report also showed that the ministry's after-tax earnings were 15 million yuan (US$2.4 million), 31 million yuan (US$5 million) in 2010 and 2011, respectively. However, in the first half of 2012, it reported 8.81 billion yuan (US$1.41 billion) in losses.

For this year's investment in railway infrastructure construction, 200 billion yuan (US$32.04 billion) will be sourced from the bond market and more than 200 billion yuan (US$32 billion) through bank loans. This means that 70% to 80% of the ministry's investment in railway construction will come from loans.

On the other hand, while there is a conflict of interest between local governments and the ministry regarding the provision of funds for railway construction, they are in agreement that railway construction needs to be accelerated to reach planned administrative achievements.

China invested a record high of 800 billion yuan (US$128 billion) in railway construction in 2010. However, due to a policy change, local governments subsequently faced mounting pressure against drawing loans, following which the railway ministry shifted the responsibility of taking loans for building inter-city railway lines to local governments. Under such circumstances, cash-strapped local governments would usually be expected to raise funds by issuing bonds.

A source close to the ministry told the newspaper that given the high liability rate and high capital leverage rate involved in railway construction, the central and local governments had to increase the allocation of funds for railway construction instead of solely relying on borrowing money.